Valuing a dental practice: methods, inputs and questions to ask

This guide explains how dental practice valuation works. It comes from Copeland Consulting Services and uses public sources. It is general education. It is not legal, tax or financial advice, and it is not a valuation. A practice value depends on facts that only a qualified valuator can review, so involve a valuator, a CPA and an attorney.

It is part of the dental practice ownership guide. Buyers should also read the guide to buying a dental practice. Sellers should read the guide to selling a dental practice.

Why does a practice need a valuation?

A valuation gives buyers, sellers and lenders a reasoned estimate of what a practice is worth, so each side can negotiate from the same facts. People ask for one when they plan to sell, buy, buy in, or test a lender’s view. Your attorney and CPA can name other reasons. A listing price or a seller’s hope is not a valuation.

Valuations matter more as ownership changes. The ADA Health Policy Institute reports that 73 percent of US dentists owned a practice as of 2023, down from 85 percent in 2005. The HPI brief finds that ownership comes later in a career for newer graduates. Buyers and sellers in any transition need a fair way to set a price. See the practice ownership trends post.

What is the difference between price and value?

Value is a reasoned estimate. Price is what a buyer and seller agree to pay. They can differ for many reasons. The ADA notes a similar trade-off on timing: sellers can decide “whether you prefer to accept a lower price for a faster sale or if you’re able to allow more time in order to reach a broader market of potential buyers.”

A valuation gives you a starting point. Your negotiation decides the price.

What methods do valuators use?

The SBA says, “There are many different methods to determine a fair price for the sale of the business.” It lists five. They apply to any small business, including a dental office. A valuator may use one or blend several.

The table uses the SBA’s own words in quotation marks. For plain-language entries on related approaches, see the glossary pages on the income approach, the market approach and the cost approach. The post on valuation methods goes deeper on how they compare.

What do the methods tell you?

Each method asks a different question.

• Earnings-based methods ask what the practice earns and what return a buyer needs. They depend heavily on how earnings are measured and adjusted.
• Cash flow method asks how much debt the practice can support. This matters to lenders.
• Asset method asks what the equipment and other tangible items are worth. It leaves out value tied to patients and reputation unless added another way.
• Intangible asset method asks what a specific intangible would cost to create. It fits when a buyer wants one particular asset.

No method is correct for every practice. A valuator should explain why a method fits yours.

What does a valuator need from the practice?

Every method starts with records. The ADA’s seller tip sheet lists documents a practice should prepare, and a valuator will usually ask for the same kinds of items. Treat this table as a starting list. A valuator will give you its own.

Make sure the records are complete and consistent. A valuator will compare statements, tax returns and the practice management system. Gaps invite questions and slow a sale.

Key measures to understand

These measures appear in most valuation reports. Know what each one means before you read the report.

• Production is the total amount billed at the practice’s fee schedule. Collections is the money actually received. Confirm which one a figure uses. See the production versus collections post.
• EBITDA is a measure of earnings, and adjusted EBITDA changes it for items the valuator treats as one-time or owner-specific. Ask the valuator to list every adjustment and the reason for it. See the EBITDA post.
• Overhead shows how much of revenue goes to running costs. See the overhead percentage post.
• Accounts receivable is money owed to the practice. Ask how a sale treats it.
• Goodwill is value beyond tangible assets. It matters for taxes, as the next section shows.

For measures used in operations, the KPI guide explains how to track them.

How does goodwill affect taxes in a sale?

In a sale of a business’s assets, the purchase price is divided among asset types, and that division affects both parties’ taxes. The IRS says, “Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale” when goodwill or going concern value attaches to the assets.

The Form 8594 instructions add, “An allocation of the purchase price must be made to determine the purchaser’s basis in each acquired asset and the seller’s gain or loss on the transfer of each asset.” They list asset classes and say the allocation follows an order: remaining consideration goes to classes in a set order, and goodwill and going concern value fall in the last class, Class VII.

This guide does not say how to allocate in a given deal. That is tax advice. Ask a CPA how an asset sale would be treated for you, and ask your attorney how the contract describes the allocation.

What drives a valuation up or down?

The sources opened for this guide do not rank value drivers or give numbers for them. These are questions a valuator or buyer may raise, framed so you can test your own practice. Do not read any item as a promise of a higher value.

The ADA’s materials list a topic called “15 Ways to Increase Practice Value ASAP” in its transitions videos. This guide cannot say what those ways are because it did not open the video. Look for the ADA resource if you want its view.

Why does this guide give no multiples or rules of thumb?

Some people quote multiples of collections or earnings, or short numeric rules, as ways to value a practice. This guide quotes none. No source opened for this guide publishes a standard that supports them. A single number also hides the method and the inputs. If someone gives you a multiple, ask these questions:

1. Who published it, and in what year?
2. What does it multiply: collections, production, earnings, or something else?
3. Which practices and which time period does it cover?
4. What was left out, such as real estate, equipment or accounts receivable?

A valuator’s report should show the method, the data and the assumptions, so you can see how it reached the number. See the valuation multiple entry for what the term means.

How do you choose a valuator and review the report?

The ADA advises assembling a team of professionals for a sale. It lists a valuator “to assist in developing an independent and objective assessment regarding the actual worth of the practice, the patient population, equipment and, if applicable, real estate.” It adds that you may want one who specializes in dental practices.

Questions to ask before you hire:

• How many dental practices have you valued, and how recently?
• Which methods will you use, and why?
• What records do you need, and how long will the work take?
• How are you paid, and does your fee depend on the result?
• Will the report be written, and will it show assumptions and adjustments?
• Do you also act as a broker or lender? If so, how do you handle that conflict?

Questions to ask once you have the report:

1. What range did you reach, and what drives the low and high ends?
2. Which adjustments did you make to earnings, and why?
3. What would change the value, such as a change in payer contracts or staff?
4. What does the report include for equipment, real estate and accounts receivable?
5. How would a sale price split among asset types, for tax reporting?

Take the answers to your CPA and your attorney.

Who else is on the team?

The ADA lists other professionals for a sale. Each one answers a different question. Use this table to decide whom to call first.

Ask every adviser how they are paid. Then check whether anyone gains more if the price goes up or down. The selling guide covers the seller’s side in more detail.

Next step

For the full ownership picture, read the dental practice ownership guide. To ask about practice ownership, contact Dr. Jon Copeland, DDS, a general dentist in Wildwood, Missouri: contact Dr. Copeland about consulting.